The sale of Telstra is not in our best interests

Communications Minister Richard Alston asked (on this page on Friday) why I insist on the Government running a phone company. I don't. I argue it is in the public interest that the Government continue to own 50.1 per cent of Telstra, which gives it the power to appoint Telstra directors and direct Telstra to act in the public interest.

The September 1999 T2 prospectus said: "Under the Telstra Act, the Communications Minister may direct the company to act in ways that benefit the public interest even though these actions may not be in the best interests of Telstra's other shareholders."

There is no doubt government ownership prevented Telstra from getting involved in the dotcom bubble mania.

It is more than likely that if Telstra management had not been constrained by the cautious hand of government, it would be in the position of the fully privatised British Telecom, which now rates 13th by market capitalisation - behind Telstra which is 12th, despite the fact the British market is about three times bigger than Australia's.

The Government isn't about to flood the market with Telstra shares, even if it could. According to the Telstra sale bill tabled in Parliament last month, the Commonwealth "may transfer some of its shares in Telstra into a wholly owned Commonwealth company that would issue sale-scheme hybrid securities". This is nothing more than a bit of fancy financial engineering designed to get Commonwealth debt off the balance sheet, at huge profit to the financiers and lawyers who engineer the swizzle.

Alston asks, "Why should all Australians continue to be saddled with the remaining $32 billion" of federal debt.

According to the Treasury website, the Commonwealth has $57.2 billion of Commonwealth Government Securities on Issue, not $32 billion.

"Can Alston explain how the Commonwealth is $30 billion better off if it sells $30 billion worth of assets?"

And can Alston explain how the Commonwealth is $30 billion better off if it sells $30 billion worth of assets?

The burden of my argument is that after meeting massive transaction costs involving giving investor inducements up to 10 per cent of the value of the shares, and paying fees and commissions to brokers and bankers totalling $500 million, the Commonwealth would only raise $25 billion on shares worth $29 billion.

Alston claims the Government would use the proceeds of the sale of second half of Telstra to reduce debt. But the Government will not do this because it would have to offer a premium of up to 25 per cent to induce bond holders to part with securities with a coupon rate of 7 to 8 per cent, which would mean the $29 billion sale would only result in a debt reduction of about $20 billion.

The Treasurer has announced that he is keeping the bond market and they will retain up to $25 billion on deposit at the Reserve Bank.

These term deposits have a lower yield (4.8 per cent) than the dividend paid by Telstra (currently 5.1 per cent).

The explanatory memorandum to the Telstra privatisation bill says: "Proceeds from the sale of the Commonwealth's remaining shareholding in Telstra will be used to reduce debt and may also be allocated to fund other Commonwealth liabilities."

In other words, the Government's intention is to dissipate the remaining 50 per cent of the nation's wealth tied up in Telstra in exactly the same way as it has dissipated the previous 50 per cent - except an unspecified amount of the Government's shares will be exchanged for an exotic form of debt through a Commonwealth paper entity, which will allow it to claim that the transaction has made public debt disappear.

Alston's argument is internally contradictory. He says I offer no evidence for my argument that "Australia will be worse off as a result of full privatisation because Telstra will put the interests of shareholders before the national interest".

But in the next paragraph he ignores the warning to prospective shareholders in his T2 prospectus to argue Telstra directors are "required by law to operate on a fully commercial basis . . . Telstra directors already do so, at times quite stridently and vigorously rejecting any overarching social obligation".

Do we assume that social obligations conflict with the national interest? Or do we assume that Telstra can be regulated to conform to the public interest?

Competition policy doesn't begin to get to the heart of the national interest as it relates to telecommunications. Especially in Australia, telecommunications is a natural monopoly. Whether Telstra meets its national interest obligations depends on the level of its investment and how it is allocated across the country. It is the level and distribution of this investment that determines whether customers in the bush will have access to broadband in 2005, 2010 or never.

Apart from mobile phones, Telstra's competition is engaged in arbitrage, using the Telstra physical infrastructure to varying degrees. If the regulatory authority sets interconnect fees too low in the opinion of Telstra, Telstra can respond by cutting back investment.

The national interest demands that broadband be rolled out in anticipation of demand throughout the length and breadth of the country.

It won't be done unless the Government has the power to hire and fire Telstra directors.